Month: February 2016

February 19 – February 25, 2016

China’s media censorship. Life insurance companies face a daunting future. S&P earnings not quite so. Commercial real estate values in limbo.

Some weeks I wonder if there will be enough quality material to post and then there are weeks like this one when there is a deluge.  I am going to focus on four themes, three that apply to everyone and one that is specific to commercial real estate.  1) The New York Times provided some great coverage this week highlighting Beijing’s increased censorship of the media, first in Edward Wong’s “Xi Jinping’s News Alert: Chinese Media Must Serve the Party” and second in Edward Wong and Neil Gough’s “As China’s Economic Picture Turns Uglier, Beijing Applies Airbrush”, 2) was an article in The Economist “The fallout from low interest rates (2): The lowdown” that highlights the effect low and negative interest rates are having on life insurance companies, 3) is a must read by Justin Lahart “S&P Earnings: Far Worse Than Advertised” in The Wall Street Journal, and 4) for the commercial real estate professionals is Tracy Alloway’s Morgan Stanley Says U.S. Commercial Real Estate Price Growth Will Be Flat in Bloomberg.

Other items that are worth a mention (there is quite a bit this week):

  • World trade records biggest reversal since crisis in 2008. “The value of goods that crossed international borders last year fell 13.8% in dollar terms – the first contraction since 2009 – according to the Netherlands Bureau of Economic Policy Analysis’ World Trade Monitor. Much of the slump was due to a slowdown in China and other emerging economies.”
  • Jamil Anderlini of the Financial Times wrote a great article around the theme of recessions following development of ‘the world’s tallest tower’ in The Chinese chronicle of a crash foretold.
    • “Today, some analysts describe the Chinese real estate market as the single most important sector in the global economy – and the biggest risk factor. This is less fantastic than it sounds when you consider that in two years – 2011 and 2012 – China produced more cement than the US did in the entire 20th century.
    • “The building boom of recent years has led to enormous excess inventory but the true scale is impossible to estimate because developers and local governments are offered incentive to under-report the problem.”
    • “An outright decline in real estate investment, which is surely coming, will also have profound implications for the rickety, debt-laden Chinese financial system. Analysts estimate that more than 60% of Chinese bank loans are directly or indirectly tied to real estate.”
    • “According to officials in several Chinese cities, their solution is to break ground on entirely new districts and to offer land to “better quality” property developers at marked down prices. The hope is that developers will abandon the existing empty blocks, and build higher quality apartments that can be sold to consumers for big discounts because of the lower land costs.”
    • Never mind the write offs and losses that would have to take place on the unused buildings. Question: are they completely uninhabitable or is really a matter of demand?
  • The Buttonwood column in The Economist does a good job of pointing out one of the larger problems of the weak markets.
    • “Since the crisis commercial banks seem to have retreated from their market-making role. The impact of this shift has been disguised by the huge amounts of liquidity injected by central banks. But as central banks scale back their support, the underlying investors (pension funds, insurers, hedge funds and the like) will have to rely on each other to act as willing buyers and sellers. That seems highly likely to result in more volatile markets than in the past, especially when the outlook for the economy is unclear. Buckle up.”
  • A good but somewhat sad read in the NYT, Reporting on Life, Death and Corruption in Southeast Asia.
  • If you want to scare yourself… China’s Ticking Time Bomb: A Runaway Banking System Bloated With Hidden Bad Loans and Singapore Lawyers Warn of 1998-Like Pain as Debt Defaults Spread
  • Lastly, all commercial real estate professionals, especially those on the retail side of the business should read Weak Holidays Force Retailers to Shrink, Rethink Web

Interesting graphics:

From The Economist, all is not well in Hedge Fund land.

Economist_Hedge funds_2-25-16

*Note: bold emphasis is mine, italic sections are from the articles.

Xi Jinping’s News Alert: Chinese Media Must Serve the Party. Edward Wong. The New York Times. 22 Feb. 2016.

As China’s economy downshifts to a ‘new normal,’ the party heads in Beijing are finding the media to be a thorn in their side particularly when it relates to information that isn’t positive.  Thus…

All news media run by the party must work to speak for the party’s will and its propositions, and protect the party’s authority and unity” – Xi Jinping, according to Xinhua, the state news agency.

Mr. Xi also wants to curb the presence of foreign media companies. Last week, government agencies announced a regulation that would prevent foreign companies from publishing and distributing content online in China. That could affect Microsoft, Apple and Amazon, among others.”

Hardly seems sporting.

“An essay in China Daily, the official English-language newspaper, offered an explanation on Monday about why Mr. Xi was unveiling his policy now.

“It is necessary for the media to restore people’s trust in the party, especially as the economy has entered a new normal and suggestions that it is declining and dragging down the global economy have emerged,” the essay said.

“Some political analysts note that Mr. Xi’s attempts to impose total control over the media say as much about his personal insecurities as they do about any Marxist-Leninist ideological vision that he holds.

“The most important thing is for him to announce his absolute authority,” said Zhang Lifan, a historian. “He doesn’t feel effective and confident in dealing with problems, and he lacks a sense of security.”

Mr. Zhang added, “He worries the Chinese Communist Party will lose political power, and he also worries that his peers will shove him from his position.”

A subsequent and related article:

As China’s Economic Picture Turns Uglier, Beijing Applies Airbrush. Edward Wong and Neil Gough. The New York Times. 25 Feb. 2016.

“‘Data disappears when it becomes negative,’ – Anne Stevenson-Yang, co-founder of J Capital Research, which analyzes the Chinese economy”

“In January data released last week, the Chinese central bank omitted or hid one key number and altered the parameters of another that gave insight into what the central and commercial banks were doing to prop up the country’s currency.”

When you go around and meet state-owned industry people, everybody laughs at the national statistics, so I don’t know why foreigners believe them,” – Ms. Stevenson-Yang.

Unfortunately, political control of the media is not unique to China (think Russia, Venezuela, etc.), the issue is how important to the global economy China has become and yet the country’s data is questionable at best making it difficult for other policy makers to ascertain appropriate steps to help the global economy along.


The fallout from low interest rates (2): The lowdown. The Economist. 20 Feb. 2016.

Subtitle: Insurers regret their guarantees

This article articulates the challenges that life insurers are facing (let alone banks, pensions, etc.) in the low-to-negative interest rate environment.

“Insurers tend to be prudent investors who like steady returns, which is why around 80% of their assets are in fixed-income securities. This served them well during the financial crisis, but today – with bond yields at historic lows, and even in negative territory-it hurts their investment income. This is particularly true for life insurers, which own over $21 trillion of the industry’s $28 trillion (of) assets, and rely heavily on this investment income to pay policy holders.”

“European insurers are especially exposed. Over two-thirds of life-insurance policies in force in the EU today offers some sort of guarantee.”

“Moody’s, a rating agency, reckons those most at risk tend to be in Germany, the Netherlands, Norway and Taiwan, where average duration gaps are especially large (14 years in Norway) or guaranteed rates are eye-wateringly high (4-5% in Taiwan).”

“The average returns promised to German policyholders are far higher than the yields on government bonds that insurers can now buy. Corporate bonds offer returns that are barely higher, which leaves two options: invest in riskier assets such as equities (which will require the insurer to put more capital aside), or face the fact that annual payouts to policyholders will outstrip income, a recipe for losses.”

“Faced with this prospect, life businesses are doing what they can to push risk back to the customer. In some countries, such as France, the promises made to existing policyholders have the built-in flexibility to be scaled back. But mostly the burden falls on new policyholders, who are no longer sold products with guarantees.

Ironically this de-risking creates a different danger: that the industry becomes irrelevant. By removing the key selling point of an insurer over a mutual fund – the assurance that a policy will pay out no matter what – the industry risks negating its business proposition to investors looking for security.”

“The classic model thrives on short-term interest rates of between 2-6%, government bonds yielding at least 4% and no worries about defaults.”


S&P Earnings: Far Worse Than Advertised. Justin Lahart. The Wall Street Journal. 24 Feb. 2016.

This article is an eye opener.

“With most calendar-year results now in, FactSet estimates companies in the S&P 500 earned 0.4% more per share in 2015 than the year before. That marks the weakest growth since 2009. But this is based on so-called pro forma figures, results provided by companies that exclude certain items such as restructuring charges or stock-based compensation.

Look to results reported under generally accepted accounting principles (GAAP) and S&P earnings per share fell by 12.7%, according to S&P Dow Jones Indices. That is the sharpest decline since the financial crisis year of 2008. Plus, the reported earnings were 25% lower that pro forma figures – the widest difference since 2008 when companies took a record amount of charges.

The implication: Even after a brutal start to 2016, stocks may still be more expensive than they seem. Even worse, investors may be paying for earnings and growth that aren’t anywhere near what they think.”

WSJ_The GAAP Gap - 2-25-16

“Companies ostensibly provide pro forma figures to better reflect the underlying tenor of their operations… But companies have had a history of treating the ordinary as extraordinary when business conditions worsen.

Indeed, outside of 2008, the only other times the GAAP gap was as wide as last year was in 2001 and 2002. That was back when companies wrote off billions of dollars worth of dot-com bubble-era investments.”

“Companies sometimes will also look past charges that result from big swings in the value of their assets. Chesapeake Energy, for example, on Wednesday reported a full-year 2015 loss of $14.9 billion under GAAP.

But the company said that after adjusting for items “typically excluded by securities analysts in their earnings estimates,” it lost just $329 million. The major item Chesapeake and many other energy companies left out of their 2015 pro forma results were charges related to the steep decline in energy prices.”

About our oil reserves being worth tens of billions less, hey look at that squirrel over there…

“This is why skeptics tend to call pro forma figures EBBS, or earnings before bad stuff.”

“Energy companies registered some of the biggest differences between GAAP and pro forma earnings. In total, S&P 500 energy companies had an estimated GAAP loss of $48 billion. That stands in stark contrast to the $45 billion of income they reported on a pro forma basis.

Come again… that’s a $93 billion swing.

“Materials companies reported $13 billion in GAAP earnings compared with $30 billion in pro forma earnings. And health-care companies earned $104 billion under GAAP versus $157 billion pro forma.”

“And then there was tech: Under GAAP, S&P 500 tech companies earned an estimated $176 billion in 2015, $42 billion less than their pro forma earnings of $218 billion”

“Overall S&P 500 earnings under GAAP came to $787 billion last year, S&P Dow Jones Indices estimates. That is $256 billion less than the pro forma estimate of $1.04 trillion.”


Morgan Stanley Says U.S. Commercial Real Estate Price Growth Will Be Flat. Tracy Alloway. Bloomberg. 23 Feb. 2016.

“Morgan Stanley analysts last week predicted U.S. commercial real estate prices would grow by a big fat zero percent in 2016, replacing a previous forecast of 5% growth over the course of the year.”

“We recognize the very important role that the lending markets have played in the recovery in CRE prices,” the analysts write. “Indeed, our analysis shows that a 10 percentage point decline in the loan-to-value ratio (from 70% to 60%) requires 2.25 percentage annual net operating income growth to offset the lower leverage.”

“Throw in higher financing costs-U.S. financial conditions have already tightened following the Federal Reserve’s decision to raise interest rates back in December – and required income needs to increase even more.”

Bloomberg_CRE Price Sensitivity_2-23-16

This article ties well into the one above along with Weak Holidays Force Retailers to Shrink, Rethink Web.  If the tenants, users of space, are experiencing margin squeeze, how likely is it that they’ll be able to absorb meaningful rent growth?  At this point commercial real estate appreciation (on the whole) is reliant on the cost of financing equity and debt [described in the chart as Weighted Average Coupon (WAC)].  Fortunately, as a result of low-to-negative interest rates, life insurers and SWFs are looking for yield.  However, only for the best stuff as highlighted by the growing yields in BBB CMBS offerings due to declining demand.


Other Interesting Articles

Bloomberg Businessweek

The Economist


Bloomberg – The U.S. States Where Recession Is Already a Reality 2/21

Bloomberg – China’s Debt Seen Rising Through 2019, Peaking at 283% of GDP 2/21

Bloomberg – Sovereign Wealth Funds May Sell $404 Billion of Equities 2/22

Bloomberg – Singapore Lawyers Warn of 1998-Like Pain as Debt Defaults Spread 2/22

Bloomberg – Can Things Get Any Worse for Russia? You’re About to Find Out 2/23

Contra Corner (Business Insider) – China’s Ticking Time Bomb: A Runaway Banking System Bloated With Hidden Bad Loans 2/19

CoStar – Four Major Property Sectors Showing Weaker CMBS Loan Underwriting 2/22

FT – China central bank moves to strengthen control of money supply 2/18

FT – Uber losing more than $1bn a year in China 2/18

FT – San Francisco: bubble fears fail to curb rush to build new condos 2/19

FT – Smart beta ‘could go horribly wrong’ 2/22

FT – Helicopter drops might not be far away 2/23

FT – South Korea household debt pile mounts 2/23

FT – Venture capital starts to tune out of on-demand services 2/24

FT – The Chinese chronicle of a crash foretold 2/24

FT – Exports from China to Brazil collapse as recession deepens 2/25

FT – World trade records biggest reversal since crisis 2/25

FT – Oil industry tormented by latest price slump 2/25

Investment News – FBI raids offices of Texas REIT (UDF) 2/18

NYT – In Zika Epidemic, a Warning on Climate Change 2/20

NYT – Reporting on Life, Death and Corruption in Southeast Asia 2/21

NYT – Indian Caste Protests in Haryana Choke Delhi’s Roads and Water Supply 2/22

NYT – Seas Are Rising at Fastest Rate in Last 28 Centuries 2/22

NYT – Once a Coup, Energy Transfer Deal Becomes a Nightmare 2/25

WSJ – IPO Market Dries Up as Investors Retreat 2/18

WSJ – U.S. New-Home Sales Fell Sharply in January 2/24

WSJ – Bank-Stock Bloodbath: The Cycle Financials Can’t Escape 2/24

WSJ – Weak Holidays Force Retailers to Shrink, Rethink Web 2/25


February 12 – February 18, 2016

Chinese seasonal lending binge. CMBS risk premiums are jumping. More shipping woes.

Three key articles that stand out this week are 1) a posting by Bloomberg News “China’s New Credit Surges to Record on Seasonal Lending Binge”, 2) Serena Ng’s “Warning Light Flashes for the Commercial Property Boom” in The Wall Street Journal, and 3) Bruce Einhorn’s “The Shipping Industry Is Suffering From China’s Trade Slowdown” in Bloomberg Businessweek.

Other items that are worth a mention:

Interesting graphics (none inserted this week):

*Note: bold emphasis is mine, italic sections are from the articles.


China’s New Credit Surges to Record on Seasonal Lending Binge. Bloomberg News. Bloomberg. 15 Feb. 2016.

What is China doing now that its economy is slowing?  Issuing more debt.

“China’s broadest measure of new credit surged to a record as a seasonal lending binge coincided with a recovery in property prices.

Aggregate financing rose to 3.42 trillion yuan ($525 billion) in January, according to a report from the People’s Bank of China on Tuesday, compared with the median forecast of 2.2 trillion yuan in a Bloomberg survey. New yuan loans jumped to 2.51 trillion yuan, also a record and beating the median estimate of 1.9 trillion yuan.”

“Chinese banks expanded their balance sheet aggressively in the first month of this year, which implies an implicit support from the government to counter the economic slowdown. In addition, Chinese corporates should have turned to onshore for funding, while offloading some external borrowing.” – Zhou Hao, senior economist at Commerzbank AG in Singapore

Corporations issued 454.7 billion yuan of notes in January, 2.5 times the amount sold a year earlier, as the yield on top-rated 10-year corporate notes dropped to a decade low in January.

It makes sense that yields would drop as the outstanding amount of debt increases… oh wait, shouldn’t it be the other way around? But China is not unique in this, recall the run up in US real estate debt prior to 2007-2008.

Granted part of this debt is seasonally related.

“While the jump in new loans is mostly attributable to banks front loading their full-year lending targets and the central bank’s efforts to keep liquidity ample ahead of the week-long Lunar New Year holiday, it also shows increasing financial support to the real economy, according to Chen Ji, a Bank of Communications Co. analyst in Shanghai.”

Understandably, this stimulus is an easier measure than adjusting rates again.

“The central bank has turned to cash injections this year instead of cutting benchmark interest rates, as additional reductions could further exacerbate capital outflows. Net injections since mid-January have been the equivalent to about the same as a 1 percentage point cut to banks’ required reserve ratios.”

And for the property market:

“The PBOC also stepped up support for the property market this month, saying Feb. 2 it would allow banks to cut the minimum required mortgage down payment to 20% for first-home purchases, the lowest level ever, from 25%.”


Warning Light Flashes for the Commercial Property Boom. Serena Ng. The Wall Street Journal. 16 Feb. 2016.

Speaking of the US commercial property market.

“Bonds backed by commercial real-estate loans have weakened significantly since the start of the year amid concerns of an economic slowdown. Risk premiums on some slices of commercial-mortgage-backed securities have jumped 2.75 percentage points since Jan. 1, a move that translates into a roughly 18% drop in prices for Triple-B-rated bonds, according to data from Deutsche Bank.”

“Property owners and developers are now facing the prospect of higher rates on loans, tougher refinancings and diminished property values as debt issuance slows and financing becomes more expensive.”

“It’s not a good dynamic. The cost of financing will increase for borrowers with loans coming due.” – Lea Overby, head of CMBS research at Nomura Securities.

“Billionaire investor George Soros’s family office has been a large seller, according to people familiar with the matter.”

“CMBS with BBB credit ratings now yield more than seven percentage points above benchmark rates – a similar risk premium to U.S. junk bonds, according to data from Morgan Stanley. The bank says CMBS risk premiums are at their highest levels since late 2011.”

Note that the Public REITs are indicating that they will be net sellers this year.  It will be interesting to see how values hold up this year – granted I just received an offering for a Zero Cash Flow deal. ZIRP (Zero Interest Rate Policy)! NIRP (Negative Interest Rate Policy))!
The Shipping Industry Is Suffering From China’s Trade Slowdown. Bruce Einhorn. Bloomberg. 11 Feb. 2016.

More on the impact of the oversupply of container ships, declining commodity demand, and falling shipping prices (except for a few select places…Hawaii).

“Shipbuilders, container lines, and port operators feasted on China’s rise and the global resources boom. Now they’re among the biggest victims of the country’s slowdown and the worldwide decline in demand for oil rigs and other gear amid the oil price plunge. China’s exports fell 1.8% in 2015, while its imports tumbled 13.2%. The Baltic Dry Index, which measures the cost of shipping coal, iron ore, grain, and other non-oil commodities, has fallen 76% since August and is now at a record low.

“In Singapore, the world’s second-largest port, container traffic fell 8.7% in 2015, the first decline in six years. Volumes at the port of Hong Kong, the fourth-busiest, slid 9.5% last year.”

There is so much oversupply that now is a good time to be in the ship demolition business.

“Globally, orders for new vessels dropped 40% in 2015, to $69 billion, according to London-based consulting firm Clarksons Research. The demolition rate for unwanted vessels jumped 15%.”

Global trade is slowing down.

“The yuan has dropped 6% since last August. While that should help exports, Hutchinson Port Holdings Trust, a company controlled by Hong Kong billionaire Li Ka-shing that runs some of China’s top container terminals, has yet to see an uptick in outbound business.”


Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – NYC Tenants Battered by Rising Rents Finally Get a Break 2/11

Bloomberg – The Intriguing Math That Turns Manhattan Properties Into Shekels 2/15

Bloomberg – Goldman Sachs: More and More People Who Use Airbnb Don’t Want to Go Back to Hotels 2/16

Bloomberg – Wall Street Girds for Real Estate Debt It Must Invest In 2/17

Bloomberg – Manhattan Skyscraper New Coup for No. 4 U.S. Office Buyer Korea 2/17

Bloomberg – As Hedge Funds Struggle, REIT Shares Become Their Victims 2/18

CoStar – REITs Projecting to be Big Net Sellers This Year 2/10

FT – Rolls-Royce: first divi cut in 24 years 2/11

FT – Many suspects behind murderous markets 2/11

FT – FX world unmoved by negative interest rates 2/15

FT – Jacob Zuma vows action to prevent South Africa rating downgrade 2/16

FT – Judge orders Neymar assets seized in tax case 2/16

FT – Rising interest rates are bad for stocks 2/16

FT – Don’t forget the upside of ‘lower for longer’ oil 2/16

FT – Walmart suffers worst sales performance in 35 years 2/18

FT – ‘Helicopter money’ on the horizon, says Ray Dalio 2/18

NYT – Swedish Bank Move Creates a Global Shudder 2/11

NYT – Chinese Start to Lose Confidence in Their Currency 2/13

NYT – Dividends, Wall Street’s Battered Status Symbol 2/13

NYT – Young Saudis See Cushy Jobs Vanish Along With Nation’s Oil Wealth 2/16

NYT – China’s Foreign Exchange Reserves Dwindling Rapidly 2/18

South Florida Business Journal – Related Group launches sales of new condo in Miami at discounted pricing 2/12

WSJ – A Tesla Innovation Investors Can Do Without 2/11

WSJ – Consumers Power Past Headwinds 2/12

WSJ – Chinese Banks May Need All the Help They Can Get 2/15

WSJ – Why China’s Credit Boom Might Not Pack a Punch 2/16

WSJ – The Real Crisis is for Bank Bonds, Not Banks 2/17


Special Reports

February 5 – February 11, 2016

Negative yielding government bonds. Lending to Emerging Markets hits the brakes. Japanese 10-year bond crosses the zero bound.

Three key articles that stand out this week are 1) Elaine Moore, Robin Wigglesworth, and Leo Lewis’ “Government bond yields send recession signal” in the Financial Times, 2) Jonathan Wheatley’s “Lending to emerging markets comes to halt” in the Financial Times, and 3) Richard Barley’s “Japan and the Strange Case of the Negative Bond Yields” in The Wall Street Journal.

Other items that are worth a mention:

  • Blackstone is considering entering the public nontraded REIT (Real Estate Investment Trust) market. No surprise considering the increased volatility in the world, lack of yield in traditional investment products, that Blackstone is probably one of the best (if not the best) suited Alternative Asset Managers with the best pedigree, and that the largest player in the market (ARC) has been brought down by an accounting scandal (only the tip of the iceberg).  Watch how quickly this product category grows for Blackstone.
  • Bank profit margins are hurting from the declining spread between 10-year and two-year U.S. Treasuries.

WSJ_Yield Squeeze_2-8-16

  • From a post that Nouriel Roubini did for Project Syndicate: “…financial markets haven’t reacted very much, at least so far, to growing geopolitical risks, including those stemming from the Middle East, Europe’s identity crisis, rising tensions in Asia, and the lingering risks of a more aggressive Russia. How long can this state of affairs – in which markets not only ignore the real economy, but also discount political risk – be sustained?”

Interesting graphics:

From The Wall Street Journal, the Baltic Dry Index continues to fall (side note for the Hawaii readers, Matson just had its earnings call and indicated that while they’re having difficulties in its other markets – understandably considering the dramatic fall in shipping prices – things are going just swell for them in Hawaii.  Thank you Jones Act.)

WSJ_Baltic Dry Index - 2-9-16

*Note: bold emphasis is mine, italic sections are from the articles.

Government bond yields send recession signal. Elaine Moore, Robin Wigglesworth, and Leo Lewis. Financial Times. 5 Feb. 2016.

“In Germany, the average yield on all government debt is now negative, while Japan is on course to become the first major bond market with a 10 year bond that yields nothing. In Europe and Japan, government bonds worth nearly $6tn now trade at such highs that buyers will make a loss if they hold the paper to maturity.”

FT_Amount of negative bonds_2-5-16

So shortly thereafter, the Japanese 10 year bond did cross the zero threshold.

“At these levels the bond market is forecasting recession.” – Marcus Brookes, a fund manager at Schroders

“The Janet and John way to explain it is that for the next 10 years you have to think inflation will be much, much lower than 2% to want to buy these bonds. Otherwise you’d be locking in a loss.” – Brookes

“Investors face the difficult prospect of assessing whether low inflation has become ingrained thanks to the collapse in commodity prices. A greater concern: has central bank interference in the financial markets made pricing so opaque that investors are risking the sort of losses incurred last April, when a European Central Bank driven rally in bond markets suddenly expired?”

“The lifespan of the rally in government bonds will depend on how long investors keep faith in central banks, says Tad Rivelle, chief investment officer for fixed income at TCW, a Los Angeles based asset manager. Every economic cycle has a grand narrative that eventually unravels, he says. In the late 1990s it was the information revolution, in the 2000s it was housing prices.

‘This cycle the narrative has been that central banks have got the ball, know what they’re doing and can keep the game going as long as they want,’ he says. ‘But humans have not found a way to abolish cycles.'”


Lending to emerging markets comes to halt. Jonathan Wheatley. Financial Times. 5 Feb. 2016.

More good news.

“The surge in lending to emerging markets that helped fuel their own – and much of the world’s – growth over the past 15 years has come to a halt, and may now give way to a “vicious circle” of deleveraging, financial market turmoil and a global economic downturn, the Bank for International Settlements has warned.”

“That reversal has already taken place, according to BIS data released on Friday.

The total stock of dollar-denominated credit in bonds and bank loans to emerging markets – including that to governments, companies and households but excluding that to banks – was $3.33tn at the end of September 2015, down from $3.36tn at the end of June.

It marks the first decline in such lending since the first quarter of 2009, during the global financial crisis, according to the BIS.

“The Institute of International Finance, an industry body, said last month that emerging markets has seen net capital outflows of an estimated $735bn during 2015, the first year of net outflows since 1988.

Hyun Song Shin, head of research at the BIS, noted that “while some advanced economies had reduced leverage after the crisis, debt had continued to build up in many emerging economies. ‘Recent events are manifestations of maturing financial cycles in some emerging economies.'”

Shin “noted that the indebtedness of companies in emerging markets as a percentage of GDP had overtaken that of those in developed markets in 2013, just as the profitability of EM companies had fallen below that of DM ones for the first time.”

“Now that the dollar is strengthening, we have turned into a deleveraging cycle in Ems. So there is a sudden surge in measurable risk; all the weaknesses are suddenly being uncovered.


Japan and the Strange Case of the Negative Bond Yields. Richard Barley. The Wall Street Journal. 9 Feb. 2016.

“Japanese 10-year government bond yields turned negative for the first time ever Tuesday, and now stand at minus 0.03%. The feat has already been recorded elsewhere – the Swiss 10-year bond yields minus 0.4% – but this is the first time a member of the Group of Seven economies has seen such a development.”

“The JGB (Japanese Government Bond) market has for many over the years looked like an accident waiting to happen. The country’s debt stands at a staggering 2.4 times gross domestic product, a level far above its peers, and still rising. The International Monetary Fund thinks the ratio could reach 2.9 times by 2030. Japan lost its triple-A rating from Moody’s as long ago as 1998; it currently stands at A1.”

Across global fixed-income markets, there are now $8.7 trillion of bonds sporting a negative yield, or 21.1% of the total outstanding, according to Bank of America Merrill Lynch data.”

And yet the Yen keeps getting stronger…. To help understand Why the Yen Just Keeps Getting Stronger, see Alex Frangos’ article in The Wall Street Journal.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – More Wall Street Strategists Are Cutting Their S&P 500 Estimates 2/6

Business Journals – Small businesses have the blues this winter 2/9

Forbes – China: Land of the Setting Sun (Gary Shilling) 2/8

FT – Why it would be wise to prepare for the next recession 2/4

FT – Hedge funds target a weaker renminbi 2/8

FT – Google passes significant barrier in its plan for driverless cars 2/9

FT – Outflows from China top $110bn in January 2/9

FT – Riksbank cuts rates deeper into negative territory 2/11

FT – BNP Paribas to curb lending to US energy sector 2/11

Investment News – Blackstone considering getting into nontraded REIT market 2/4

NYT – If There Is a Recession in 2016, This Is How It Will Happen 2/4

NYT – Stung by Low Oil Prices, Companies Face a Reckoning on Debts 2/9

Project Syndicate – The Global Economy’s New Abnormal (Nouriel Roubini) 2/4

WSJ – Corporate Credit: Less Than Angelic 2/8

WSJ – Tech Stocks: Why the Selloff Could Get Worse 2/8

WSJ – Bank-Stock Carnage: This Number Is Killing Them 2/8

WSJ – Global Recession? What This Key Indicator Says About It 2/9

WSJ – Voluntary Job-Quitting Hits Highest Level in Nine Years 2/9

WSJ – This Chinese City’s (Shenzhen) Property Market Is Out of Control 2/10

WSJ – As Economy Suffers, Economic Theory Flourishes 2/10

WSJ – Why the Yen Just Keeps Getting Stronger 2/11


Special Reports

NYT – Traveling Through Venezuela, a Country Teetering on the Brink 2/9


January 29 – February 4, 2016

Stagnant wages. Debt stress. Oh Venezuela.

Three key articles that stand out this week are 1) Patrick Gillespie’s “Wages fell in 80 of 100 biggest U.S. cities during recovery” in CNN Money, 2) Sally Bakewell’s “The $29 Trillion Corporate Debt Hangover That Could Spark a Recession” in Bloomberg, which goes hand-in-hand with Peter Eavis’ “Toxic Loans Around the World Weigh on Global Growth” in The New York Times, and 3) Ricardo Hausmann’s “It could be too late to avoid catastrophe in Venezuela” in the Financial Times.

Other items that are worth a mention:

  • Evergrande Real Estate is asking its bond holders to relax its borrowing limits despite the reality that it is paying out increasing dividends to its shareholders all the while having “reported negative operating cash flows over the past five years.”
  • ChemChina is acquiring Syngenta for $34bn should the authorities agree; it will be largest outbound acquisition by a Chinese company, but more importantly it appears to me that this will become a key method for wealthy Chinese to get around tightening capital controls for getting money out of China.
  • The liquid natural gas market should brace itself for a price war now that U.S. producers are sending their first shipments of LNG to Europe, Russia will be damn sure to make it unprofitable for U.S. companies like the Saudi’s have been doing to the Shale gas providers. Not so good for Cheniere…

FT_Gazprom production costs_2-3-16

  • Because I forgot to mention this last week, in case you were wondering, Malaysian Prime Minister Najib Razak was cleared by the newly appointed Attorney General (the last one was sacked) for the $680 million that was found deposited into his personal bank accounts. All a big misunderstanding.  The money was a personal donation by the Saudi royal family and all but $61 million has been returned.  Well the Swiss authorities are calling BS and have “found ‘serious indications’ that about $4bn was misappropriated” from Malaysia through the 1MDB investment fund.

Interesting graphics:

From Bloomberg Graphics, passive investment managers winning at the expense of active managers.

Bloomberg_Asset Manager Winners & Losers_2-3-16

From the Financial Times, US junk debt yields rated triple C and lower have jumped.

FT_High yield debt index_2-4-16

*Note: bold emphasis is mine, italic sections are from the articles.

Wages fell in 80 of 100 biggest U.S. cities during recovery. Patrick Gillespie. CNN Money. 28 Jan. 2016.

This article really speaks to why for most people in the U.S. it does not feel that the economy is on firmer footing or is growing for that matter.  Bottom line, wages in most cities have not recovered in most cities and especially for minorities.

“American cities powered the U.S. economy out of the recession and into its recovery.  Out of America’s 100 largest metro areas, almost each one improved on some measure of economic growth, employment, productivity or average wealth per person. The one red flag: wages.”

“Median wages declined in 80 of those cities between 2009 and 2014, according to a new study released Thursday by the Brookings Institution. The wage declines were more pronounced among minorities than whites. Also, the wage gapes widened between races in cities with economies that ranked high overall.”

“Only eight cities out of the largest 100 saw median wages and employment rates rise while its poverty rate fell.”

“Denver, San Jose, Calif., Provo, Utah and Charleston, S.C. are among those few metro areas that saw economic inequality decrease overall… However, the median wages of white workers in Provo rose about 2% between 2009 and 2014. And the paychecks of black workers declined by nearly 20% in that time period.”

“Wage growth has been largely absent during the U.S. economic recovery, and it’s a big reason why many middle class Americans feel they haven’t benefited. Only in recent months has wage growth started to move in the right direction nationally.”


The $29 Trillion Corporate Debt Hangover That Could Spark a Recession. Sally Bakewell. Bloomberg. 28 Jan. 2016.

“There’s been endless speculation in recent weeks about whether the U.S., and the whole world for that matter, are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever.”

“Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies – one third globally – are failing to generate high enough returns on investments to cover their cost of funding.

“While not as pronounced as the rout in global equity markets, losses are beginning to pile up in the bond market too… Investors lost 0.2% on global corporate bonds in 2015, snapping a string of annual gains that averaged 7.9% over the previous six years.”

“Worsening debt profiles contributed to S&P downgrading 863 corporate issuers last year, the most since 2009.”

“Much of the cheap credit accumulated by companies was spent on a $3.8 trillion M&A binge, and to fund share buybacks and dividend payments. While that tends to push up share prices in the short term, bond investors would rather see that money spent on strengthening the business in the long term.”

But… “S&P’s global credit market outlook is stable and analysts estimate earnings will recover this year. Investment-grade firms have accumulated record amounts of cash, which will insulate them from market turbulence, according to a report from Citigroup Inc. this month.”

“At about 3%, overall borrowing costs for companies around the world remain below the average of 4.5% in the preceding two decades even as spreads have widened.”

“As of the second quarter, high-grade companies tracked by JPMorgan Chase & Co. incurred $119 billion in interest expenses over the last year, the most for data going back to 2000, according to the bank’s analysis.”

A somewhat more pessimistic outlook on this…

Toxic Loans Around the World Weigh on Global Growth. Peter Eavis. The New York Times. 3 Feb. 2016.

“Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come.”

“Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.”

“In Europe, analysts say bad loans total more than $1 trillion.”

Bad loans are on the rise in the energy and commodities sectors, in Brazil and elsewhere…

“If you have a boom and then a bust, you create economic losses.  You can hope the losses one day turn into profits, but if they don’t, they are a drag on the economy.” – Alberto Gallo, head of global macro credit research at the Royal Bank of Scotland.

“China’s financial sector will have loans and other financial assets of $30 trillion at the end of this year, up from $9 trillion seven years ago, said Charlene Chu, an analyst in Hong Kong for Autonomous Research.”

According to Chu, “the world has never seen credit growth of this magnitude over such a short time. We believe it has directly or indirectly impacted nearly every asset price in the world, which is why the market is so jittery about the idea that credit problems in China could unravel.”

“Headline figures for bad loans in China most likely do not capture the size of the problem, analysts say. In her analysis, Ms. Chu estimates that at the end of 2016, as much as 22% of the Chinese financial system’s loans and assets will be ‘nonperforming.’  In dollar terms, that works out to $6.6 trillion of troubled loans and assets.”

Ms. Chu “estimates that the bad loans could lead to $4.4 trillion of actual losses.”


It could be too late to avoid catastrophe in Venezuela. Ricardo Hausmann. Financial Times. 3 Feb. 2016.

For those that haven’t been following the falling knife that Venezuela has become…

“Domestically, the most likely scenario is an imminent economic collapse and a humanitarian crisis. Internationally, it will imply the largest and messiest emerging market sovereign default since the Argentine crisis of 2001.”

“Why Venezuela? First, because while most other oil exporters used the boom to put some money aside, former president Hugh Chavez, who died in 2013, used it to quadruple the foreign debt. This allowed him to spend as if the average price of a barrel of oil was $197 in 2012, when in fact it was only $111.”

“The year 2015 was an annus horribilis in Venezuela with a 10% decline in gross domestic product, following a 4% fall in 2014. Inflation reached over 200%. The fiscal deficit ballooned to 20% of GDP.”

“In the free market, the bolivar has lost 92% of its value in the past 24 months, with the dollar costing 150 times the official rate: the largest exchange rate differential ever registered.”

“As bad as these numbers are, 2016 looks dramatically worse.”

President Nicolas Maduro is at odds with the National Assembly (opposition candidates were recently elected despite the government controlling the media and many opposition members having been locked up as a matter of practice since Chavez and his successor have been in power) “…the government has not announced any plans to address the domestic imbalances or the balance of payments problem. It has no strategy to seek the financial assistance of the international community. It has not even increased petrol prices from their current level, where $1 buys over 10,000 litres.

“The fallout for Venezuela’s neighbors and the global economy will be substantial… Exporters to Venezuela are owed tens of billions of dollars of unpaid bills.

Under these conditions, a disorderly default, on a scale similar to the Argentine crisis, is almost inevitable.”

While the IMF was set up to help avoid situations like this, Venezuela “has not let the IMF in (the country) since 2004.”


Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Hong Kong Property Slump Worries Investors 2/1

Economist – GDP’d off: Weak American growth is probably a blip 1/29

FT – Nigeria asks for $3.5bn emergency loans 1/31

FT – Swiss wreck efforts by Malaysia to contain 1MDB scandal 1/31

FT – Putin lines up state sell-offs to plug budget hole 2/1

FT – Malaysia stifles dissent as public unrest grows 2/1

FT – China Vanke tale shows share class divide 2/1

FT – US millennials caught in the parent trap 2/1

FT – Global competitive easing leaves US alone 2/1

FT – ChemChina closes in on $34bn Syngenta deal 2/2

FT – Global gas market braced for price war 2/3

FT – Risk of US recession back on the agenda for markets 2/3

FT – US junk debt rated triple C yields 20% 2/4

NYT – China Company Accused of Fleecing Investors of $7.6 Billion 2/1

NYT – Walmart Sues Puerto Rico, Claiming an Unfair and Onerous Tax Burden 2/3

NYT – Xi Jinping Assuming New Status as China’s ‘Core’ Leader 2/4

Mauldin Economics – Tokyo Doubles Down 2/1

The Real Deal – Midtown (NYC) has more than 80 blocks of massive and very available office space 1/29

Reuters – Mid-tier Chinese banks piling up trillions of dollars in shadow loans 1/31

WSJ – Currency War: U.S. Hedge Funds Mount New Attacks on China’s Yuan 1/31

WSJ – Credit Suisse, Barclays to Pay $154.3 Million to Settle ‘Dark Pool’ Investigations 1/31

WSJ – Japan’s Negative Rates Are Rocket Fuel for Property Stocks 2/2

WSJ – Amazon Plans Hundreds of Brick-and-Mortar Bookstores, Mall CEO says 2/2


Special Reports